Sunday, 10 January 2010

Taxing Visitors

Taxing Visitors

10th January 2010

The Malta Independent on Sunday

Alfred Mifsud

Never minding some controversy, the year started with a shouting match between the Ministry of Tourism and the sector’s operators, who joined forces to complain about the introduction of a 50 cents tax on every tourist bed night that will come into force in April.

If it were possible to load taxes on visiting tourists without compromising the health and growth of the industry, we would all be happy about it. If tourists pay taxes, it means that locals will find there is less pressure from the government to fund itself by taxing them.

Life, however, is not that simple. While residents have little choice but to pay whatever taxes governments choose to impose, tourists have a choice. Ultimately, they care little about the constituent costs of the various portions of their package. What they care about is whether the total cost of our product, taxes included, compares favourably with similar products obtainable in competing destinations.

However, it is a gross exaggeration to state, as some industry operators have argued, that this tax will be the final nail in the coffin of the industry. If our tourist industry is so fragile that it can be broken by the imposition of a 50 cents per night tax, then we are really in trouble. But I don’t think this represents the reality.

For all our problems and defects, of which we have many, our tourist product remains marketable, sensitive to pricing competition, but able to withstand a breezy headwind in the form of higher taxes. If some operators in the industry cannot withstand such minor adversity, and will have to be buried in the coffin for which such taxes represent the last nail, then I would say that this would be part of a necessary creative destruction process. It would signify the elimination of those operators who have lost their competitiveness through lack of investment and upkeep. The industry in general would be served better by their demise to make space for newer, more attractive and more efficient outfits that can absorb such adversities without crisis.

Where industry operators have a valid point is regarding the timing for the introduction of such a tax, which was announced in the Budget for 2009, read in parliament in November 2008, when the current recession had not yet exposed its full ugly force.

Obviously, the government will argue that taxpayers will never agree that it is the right time to introduce new taxes. But in normal times I would say that the tax would have been absorbed without protestation, especially given that a forewarning lead-time of nearly 18 months was employed. These are, however, not normal times.

While internationally there are encouraging indications that the economy has bottomed out and has started to grow again, albeit from a much lower base, governments and monetary authorities are being extra careful, given the gravity and depth of the recession, to exit out of their stimulus packages very gently in order not to force the fragile recovery into a double dip recession.

Apart from countries such as Iceland and Greece, that really have no choice, given the disastrous state of their public finances, governments are in no mood to raise taxes and are planning fiscal repair to their deficits over the medium to long-term through economic growth.

Why should we be different? This is especially applicable in our case, when we have contemporaneously dismantled the energy subsidies that were allowed to hotels and industry through the former capping mechanism and suddenly exposed such outfits to the full force of market pricing for their energy consumption. It is even more especially so when our export operators (and tourism operators are exporters of services, with the difference that these are not shipped out but tourists are flown in to consume such exports among us) are having to compete with a an over-valued euro (some expert opinions put such over-valuation in the 20 per cent range) that is being squeezed upwards by the silent war going on between the US authorities on one hand and Asian monetary authorities on the other.

The US financial crisis can only be resolved by a weak US dollar that helps the US rebuild its manufacturing base and repatriate, or at least stop the outflow, of manufacturing processes to cheaper Asian locations. For all the lip-service being paid to the strong dollar policy, the US authorities are in practice doing very little to give such policy any tangible value and clearly intend to maintain a low interest rate policy for the whole of 2010, which does not help strengthen the dollar. On the other hand, Asian monetary authorities, China in particular, continue to peg their currencies to the US dollar and those that have no such rigid peg, such as Korea and Japan, have begun verbal intervention to abort their currency hardening. The euro is being caught in the middle of such fits of pique which, unfortunately, could well lead to escalating protectionism during 2010, which would in turn almost certainly halt international growth in its tracks.

Without any support from Sterling, due to the UK’s domestic problems from the financial crisis, the euro is carrying this burden almost alone, with limited assistance of minor currencies such as the Swiss Franc and the Scandinavian Kroner.

Given such a particular set of unfavourable circumstances, it would not be amiss if government were to adopt a dose of reality and postpone the introduction of the bed night tax for 12 months, hoping that the euro over-valuation will have worked itself out in the meantime, and expecting to introduce it in April 2011, when economic growth, and the tourism industry in particular, will hopefully be on a clear sustainable upswing.

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